7/30/2019 fs_2013_2

1/41

STOCK EXCHANGES

7/30/2019 fs_2013_2

2/41

To discuss

Stock Exchanges Architecture

Stock Broking services

Depository services

Custodial services

7/30/2019 fs_2013_2

3/41

Stock Exchanges

What are they

Characteristics of a good market

History

Trading

Settlement

Regulation

7/30/2019 fs_2013_2

4/41

What is a Stock Exchange?

The word Stock means a fraction of the capital ofa company and the word Exchange means a

place for buying and selling some thing.

Hence stock exchange is a place or institutionfacilitating buying and selling of fraction

ownership of companies.

7/30/2019 fs_2013_2

5/41

Definition of Stock Exchange

The Securities Contracts (Regulation) Act, 1956defines stock exchange as:

an association, organisation or body of individuals,whether incorporated or not, established for thepurpose of assisting, regulating and controlling thebusiness of buying, selling and dealing in securities

7/30/2019 fs_2013_2

6/41

Functions of Stock Exchanges

Ensure increased liquidity and ready market for thesecurities.

Mobilization of surplus funds of individuals and businessfirms for investment in securities.

Determining the fair price of various securities.

Ensure fair dealings and safety of funds because of strictregulations on the working of SEs.

Listed companies have to follow the rules framed by theSEs.

Act as a barometer of the business conditions in thecountry.

7/30/2019 fs_2013_2

7/41

Characteristics of a good Market

Availability of Informationregarding volume, prices ofprevious transactions, current bids & offers

Liquidityability to buy/sell an asset at a known pricethat does not substantially differ from previous

transactions Depth - Numerous potential buyers & sellers at various

prices

Low Transaction costs - margins, brokerage costs,

depository charges Informational Efficiency -Participants want prices to

adjust to information quickly

Well regulated

7/30/2019 fs_2013_2

8/41

Evolution of Stock Markets in India

The Native Share and Stock Brokers Association, 1875

(Bombay Stock Exchange)

Ahmedabad Share and Stock Brokers Association, 1894

Calcutta Stock Exchange in 1908

Securities Contract (Regulation) Act, 1956

SEBI Act, 1992

NSE, 1993

United Stock Exchange, 2011

MCX Stock Exchange, 2012

Securities Contract (Regulation) (Stock Exchanges and

Clearing Corporations) Regulations, 2012

7/30/2019 fs_2013_2

9/41

Stock Exchanges in India

Sr. No. Name of the Exchange Valid Upto

1 Ahmedabad Stock Exchange Ltd. PERMANENT

2 BSE Ltd. PERMANENT

3 Bangalore Stock Exchange Ltd. PERMANENT

4 Bhubaneswar Stock Exchange Ltd 04-JUN-2013

5 Calcutta Stock Exchange Ltd. PERMANENT

6 Cochin Stock Exchange Ltd 07-NOV-2013

7 Delhi Stock Exchange Ltd.,The PERMANENT

8 Gauhati Stock Exchange Ltd.,The 30-APR-2013

9 Inter-Connected Stock Exchange of India

Limited

17-NOV-2013

10 Jaipur Stock Exchange Ltd 08-JAN-2014

11 Ludhiana Stock Exchange Ltd.,The 27-APR-2014

7/30/2019 fs_2013_2

10/41

Not recognized any longer: Magadh, Mangalore, Hyderabad,Coimbatore, Saurashtra Kutch

Source: SEBI

12 MCX SX Exchange Limited 15-SEP-2013

13 Madhya Pradesh Stock Exchange Ltd PERMANENT

14Madras Stock Exchange Ltd.

PERMANENT

15 National Stock Exchange of India Ltd. PERMANENT

16 OTC Exchange of India 22-AUG-2013

17 Pune Stock Exchange Ltd. 01-SEP-2013

18 The Vadodara Stock Exchange Ltd. 03-JAN-2014

19 U.P. Stock Exchange Limited 02-JUN-2013

20 United Stock Exchange of India Limited 21-MAR-2014

7/30/2019 fs_2013_2

11/41

Development of Securities Markets in

India

Freedom in designing and pricing instruments of financing

Badla system banned

Screen Based Trading in all the Stock Exchanges

Change in management structurecorporatisation and

demutualisation

(OWNERSHIP, MANAGEMENT and TRADING RIGHTS are segregated

from one another)

Registration & Regulation of Intermediaries

7/30/2019 fs_2013_2

12/41

Development of Securities Markets in India

Redressal of Investor grievances

Regulation of mutual funds and Foreign Portfolio Investment

Introduction of rolling settlement (T+2 now)

Introduction of equity derivatives trading

Introduction of Stock Lending and Borrowing Scheme

Introduction of exchange traded currency futures, interest rate

futures

7/30/2019 fs_2013_2

13/41

Trading System

Open outcry system in the Stock Exchanges without

the use of technology till NSE started trading in 1994

NSE introduced Screen Based Trading System in1994

(NEAT). In 1995, BSE introduced BOLT.

On line fully automated screen based trading system.

7/30/2019 fs_2013_2

14/41

Trading System

Price/time priority

This system follows open Electronic Consolidated Limit

Order Book Market System. The key features are:

One can place limit orders or market price orders

Computer keeps on matching mutually compatible orders on

price and time priority. First price, then time.

The limit order book i.e. the list of unmatched limit order is

there on the screen for everybody to see.

7/30/2019 fs_2013_2

15/41

Trading

Monday to Friday

Trading time 9:15am to 3:30pm on NSE

Info about trades: open, high, low, close prices;

volume; number of trades;

Opening pricediscovered in the pre-open session

Closing priceat NSE, weighted average of last half

hour of trades

7/30/2019 fs_2013_2

16/41

Clearing

Clearing corporationNSCCL (NSE)

Novationact or replacing one participatingmember of a contract with another

CC buys from seller; buyer buys from CC

Counterparty guarantee

CC protects itself using margins

7/30/2019 fs_2013_2

17/41

Settlement

Buyer gets the securities/shares and the seller gets

the money.

System followed previously : physical delivery.

Now : electronic transfer of shares with the help of

depositories

7/30/2019 fs_2013_2

18/41

Settlement

The Depositories Act, 1996

National Securities Depository Ltd (NSDL)

CDSL (Central Depositories Services Ltd.)

Under NSDL and CDSL, there are depository

participants (DPs)

T + 2 settlement, pay-in and pay-out Rolling Settlement

NSCCL (NSE)

7/30/2019 fs_2013_2

19/41

Rolling Settlement

Activity Day

Trading Rolling Settlement Trading T

Clearing Custodial Confirmation T+1 working days

Settlement Securities and Funds pay in T+2 working days

Securities and Funds pay out T+2 working days

Post Settlement Auction T+2 working days

Auction settlement T+3 working days

7/30/2019 fs_2013_2

20/41

Funds Shortages

Trading and/or clearing facility of members failing to fulfill

their funds obligations shall be withdrawn.

Securities pay-out, due to such clearing member shall also bewithheld.

And, the member will be required to pay a penal charge of

0.07% per day on the amount outstanding at the end of theday, till the amount is recovered.

7/30/2019 fs_2013_2

21/41

Securities shortages

The members are debited by an amount equivalent to thesecurities not delivered and valued at a valuation price(closing price of such securities on the immediate trading day preceding thepay-in day). This is known as valuation debit.

For all such short deliveries NSCCL conducts a buying-inauction on the T+2 day, after completion of the pay-out,

through the NSE trading system.

If the buy-in auction price is more than the valuation price,the CM is required to make good the difference.

7/30/2019 fs_2013_2

22/41

Risk Containment Measures(at NSE for Clearing Member)

Capital Adequacy requirements (for corporates) :

NSE prescribes a minimum net worth of Rs. 1 crore

cash deposit of 85 lakhs for NSEIL

Cash deposit of 15 lakhs and non cash deposit of 25 lakhs for

NSCCL

On line exposure monitoringa flash on the screen isthere if the exposure reaches certain levels (in %).

7/30/2019 fs_2013_2

23/41

Risk Containment Measures (at NSE)

Daily Margins in Cash Market Segment

Value at Risk (VaR) margin

Extreme Loss Margin

Mark To Market Margin

Margin requirementsPayable on T+1

7/30/2019 fs_2013_2

24/41

VaR Margin

For levy of VaR margin, companies are divided into 3

categories based on how regularly they are traded and on the

basis of liquidity.

Liquidity is gauged by what is technically called the IMPACTCOST.

7/30/2019 fs_2013_2

25/41

VaR Margin- Scrips divided into 3 groups

Group 1

Consist of shares that are traded on more than80% of the trading days in the previous 6 months

and have an impact cost of less than 1.00%.

For Group 1 shares VaR margin shall be higherof 3.5 times volatility or 7.50%, whichever is

higher.

7/30/2019 fs_2013_2

26/41

Group 2 and 3 scrips

Group 2 consists of shares that are traded on morethan 80% of the trading days in the previous 6

months and have an impact cost of more than1.00%.

All other shares are classified under Group 3

7/30/2019 fs_2013_2

27/41

Extreme Loss Margin

Extreme Loss Margins aim at covering the losses that

could occur outside the coverage of VaR margin.

The extreme loss margin for any stock is the higher of:1.5 times the standard deviation of the daily logarithmic

returns of the stock price in the last 6 months

or

5 % of the value of the position.

7/30/2019 fs_2013_2

28/41

Mark To Market (MTM) Margin

MTM is calculated at the end of the day on all open

positions by comparing the transaction price with

closing price of the share for the day.

MTM Profit or Loss = { (Total Buy Qty x Closing

Price)Total Buy Value} PLUS{Total Sales Value(Total Sales Qty x Closing Price)}

Excel calculation

http://localhost/var/www/apps/conversion/tmp/scratch_2/fin%20services%202013/st%20exch%20st%20brok%20dep%20cust/mtm%20profit%20loss.xlsxhttp://localhost/var/www/apps/conversion/tmp/scratch_2/fin%20services%202013/st%20exch%20st%20brok%20dep%20cust/mtm%20profit%20loss.xlsxhttp://localhost/var/www/apps/conversion/tmp/scratch_2/fin%20services%202013/st%20exch%20st%20brok%20dep%20cust/mtm%20profit%20loss.xlsxhttp://localhost/var/www/apps/conversion/tmp/scratch_2/fin%20services%202013/st%20exch%20st%20brok%20dep%20cust/mtm%20profit%20loss.xlsx

7/30/2019 fs_2013_2

29/41

Index based Market wide circuit filter

Used to stop adverse movements either way

Would be triggered by movement of either BSE Sensex or theNSE S&P CNX Nifty whichever is breached earlier.

In case of a 10% movement of either of these indices, there would be a 1

hour market halt if the movement takes place before 1 pm. In case themovement takes place at or after 1 pm but before 2:30 pm there will be a

trading halt for hour. In case the movement takes place at or after 2:30pm there will be no trading halt at the 10% level and the market will continue

trading.

In case of a 15% movement of either index, there will be a 2 hour halt if themovement takes place before 1 pm. If the 15% trigger is reached on or after

1 pm but before 2 pm, there will be a 1 hour halt. If the 15% trigger is

reached on or after 2 pm the trading will halt for the remainder of the day.

In case of a 20% movement of the index, the trading will be halted for theremainder of the day.

7/30/2019 fs_2013_2

30/41

Scrip wise price bands

Dynamic price bands at 10% of the previous closingprice for the following securities: Stocks on which derivatives products are available,

Index futures

Stock futures Further, in the event of a market trend in either

direction, the dynamic price bands shall be relaxed bythe stock exchanges in increments of 5%.

For the rest, individual scrip wise price bands of 20%either way

7/30/2019 fs_2013_2

31/41

Revenue of Stock Exchanges

Transaction chargesrange of Rs 2 to 3.5 per lakh

Listing feesInitial Rs 50,000 followed by annualfees (starts from 18000)

Annual subscriptionRs 1 lakh per member(corporates)

Others like

Interest income Investment income

7/30/2019 fs_2013_2

32/41

Income and Profit of NSE & BSE

EXCHANGE INCOME 12-13 INCOME 11-12 NET PROFIT

12-13

NET PROFIT

11-12

BSE 552.8 578.42 108.57 178.13

NSE 1000.84 1069.91 877.61 704.89

FIGURES INCRORES

7/30/2019 fs_2013_2

33/41

Our share in world M-cap

NSEs market cap stands at USD 1.15 trillion (May

2013)

World market cap stands at USD 58.58 trillion

% share: 1.96%

Data Source: World Federation of Exchanges

7/30/2019 fs_2013_2

34/41

NSE growth of CM segment

http://localhost/var/www/apps/conversion/tmp/scratch_2/fin%20services%202013/st%20exch%20st%20brok%20dep%20cust/nse%20growth%20of%20CM%20segment.xlshttp://localhost/var/www/apps/conversion/tmp/scratch_2/fin%20services%202013/st%20exch%20st%20brok%20dep%20cust/nse%20growth%20of%20CM%20segment.xls

7/30/2019 fs_2013_2

35/41

Regulation of Stock Markets

The Capital Issues ( Control) Act, 1947 (repealed in1992)

Securities Contract (Regulation) Act, 1956

Formation of SEBI in 1988

Abolition of CCI in 1992 and

The SEBI Act, 1992

Securities Contracts (Regulation) (Stock Exchangesand Clearing Corporation) Regulations, 2012

7/30/2019 fs_2013_2

36/41

Regulation of Stock Markets

Objectives of SEBI

To PROTECT the interest of the investors in securities

To PROMOTE the development of securities market in

India To REGULATE the securities market

7/30/2019 fs_2013_2

37/41

Regulation of Stock Markets

Functions of SEBI

Regulating the securities market

Recognition and regulation of stock exchanges

Registering and regulating intermediaries Registering and regulating functioning of depositories,

DPs and custodians

Registering FIIs

Registering and regulating functioning of VCFs, PMs,MFs, etc.

7/30/2019 fs_2013_2

38/41

Regulation of Stock Markets

Functions of SEBI

Promotion and regulation of SROs

Prohibiting fraudulent and unfair trade practices

Prohibiting insider trading Regulating M & A activities

Promoting investor education and training ofintermediaries

Conducting research related to securities market Perform the functions and exercise powers of GoI under

SCRA, 1956

7/30/2019 fs_2013_2

39/41

Regulation of Stock Markets

Powers of SEBI

Discovery and production of books of accounts andother related documents

Summoning, examining and enforcing attendance ofpersons/representatives

Inspections of books, registers and other documents ofintermediaries and listed companies

7/30/2019 fs_2013_2

40/41

Regulation of Stock Markets

SROsSelf Regulatory Organization

A non-governmental organization that has the power tocreate and enforce industry regulations and standards. The

priority is to protect investors through the establishment of

rules that promote ethics and equality.

Purpose behind emergence of SROs

Examples of SROsNSE, BSE, AMFI, AIBI, etc

Sebi planning to set up an independent SRO For regulation of trading members

Listing and market surveillance to remain withexchanges

7/30/2019 fs_2013_2

41/41

Regulation of Stock Markets

International Organization of Securities Commissions

Headquartered in Spain

association of organisations that regulate the worlds

securities marketsmembers from over 100 different countries

Role:

to assist its members to promote high standards of regulation

and act as a forum for national regulators to cooperate with

each other and other international organisations